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The forint has sunk to a record low against the Polish złoty as concerns grow about the independence of Hungary’s central bank, while Warsaw’s improving relationship with the EU has unlocked tens of billions of euros of funds.
The two central European countries have been on markedly different paths in recent months. Hungary has been bogged down in disputes with international partners such as the EU and other Nato members while tensions have grown between the government and central bank. Meanwhile, the European Commission is starting to release Poland’s €137bn in frozen EU funds after it recently decided that Warsaw had made “decisive” efforts to restore the rule of law.
The forint has fallen by 6 per cent against the złoty over the past six months to its lowest level on record. The sell-off gained momentum this week after Hungary accelerated its pace of interest rate cuts. That came just a day after the European Central Bank had called on Budapest to respect the independence of the country’s central bank.
The rate cut has further narrowed the gap between the two countries’ borrowing costs. Hungary’s key rate dropped by 1 percentage point to 9 per cent this week, having fallen from 13 per cent in the autumn. Rates in Poland, meanwhile, have been held at 5.75 per cent since parliamentary elections in October that brought former European Council president Donald Tusk back into office.
“The interest rate advantage of the forint [over the euro] is melting away while the złoty’s interest rate advantage is steady,” said Péter Virovácz, an analyst at ING in Budapest.
Tensions in the Hungarian capital escalated on Thursday after central bank governor György Matolcsy said Viktor Orbán’s government was planning a “significant attack” against the bank’s independence and that the prime minister’s policy to boost the economy by stimulus was “doomed to fail”.
The Orbán government, which has pushed for much faster rate cuts to help boost anaemic economic growth, has proposed a bill that would allow it tighter controls over the operations of the central bank, although not over monetary policy. Growing hostilities between Matolcsy and members of the Orbán cabinet also contributed to a view among many investors that the central bank was being targeted with attempts at influence by the government.
Meanwhile in Poland, the central bank has been reluctant to reduce rates, with analysts expecting the next cut to come in the third or fourth quarter of this year — if at all. Policymakers have shifted their focus to medium-term inflation risks, highlighting the threats from a tight labour market, robust wage growth and expansionary fiscal policy.
The złoty has been one of the best-performing major currencies globally over the past year, rising 9.5 per cent against the dollar. The forint has been among the 10 worst, down 3.9 per cent.
“Rate differential is a major factor driving the divergence between the currencies, and central bank independence is at risk in Hungary,” said Piotr Matys, a foreign exchange analyst at InTouch Capital. “At the same time you have EU funds that will be flowing into Poland, while Hungary still needs to do more to gain full access to EU funds.”
As Poland starts to receive billions of euros from the bloc, markets expect that at least some of the funds released from Brussels will be converted into złoty, providing additional support for the currency.
While the EU released €10bn to Hungary late last year, Budapest faces “no such prospect” of a full release of European funds, according to ING’s Virovácz. Any funds released to Hungary are delivered in, and usually kept in, euros, providing little support to the forint.
Diverging political and economic drivers in the two central European countries have helped make their currencies “one of the most actively traded relative value currency pairs”, said Murat Toprak, a foreign exchange strategist at HSBC.
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